Good morning! I'm Terry Prather of Payne Wealth Partners in Evansville, Indiana joining today's chat.
Terry, you can take this first question from Iars
lars: I don't initially see any problems with this plan, although it is difficult without knowing all of your financial details. In the grand scheme of things, a 15% federal tax rate seems fairly low - especially considering all the financial challenges our federal govt. faces. This is a strategy we're executing for some clients.
lars: In its most basic form, the Roth IRA conversion analysis considers your current income tax rate vs. what your future potential rate may be.
Thanks, Terry. Here's our next one from Gina
Gina: If you have three different 403(b) accounts, I believe you'll need to take an RMD (required minimum distribution) from each separate 403(b) account. You should double-check with your tax professional. If, however, all the different mutual funds are in the same 403(b) account, it doesn't matter from which mutual fund the $ comes
from...as long as the full minimum distribution is taken (and therefore taxable income reported on your tax return). I hope I've answered your question.
Here's our next question from Owen
Owen: I'm sorry, but I would defer to a qualified CPA on this question. Otherwise, I'd have to do some research.
Thanks, Terry. Here's a follow-up for Owen. Maybe you two can figure something out from here. If not, Owen, your best move will probably be to check with a CPA
Owen: Great question! The bottom line - which we call basic Roth math - is that an individual will have the same $ by using the Roth or traditional IRA/401k in retirement if his pre-retirement and retirement tax rates are the same. The one point in your comment that is incorrect is that Roth IRA withdrawals are income tax-free. My next post will give you a simple example.
Owen: Tax Rate = 25%. Scenario 1 - My wife and I have $10,000 in a Traditional IRA that doubles to $20,000 over time. I withdraw the $20,000 and pay $5,000 in tax (25%) with $15,000 left over to spend. Scenario 2 - I pay the tax upfront (25% of $10,000 = $2,500) and then put $7,500 in a Roth IRA. It's invested the same and therefore doubles in value to $15,000. All is withdrawn tax-free. Scenario 1 and 2 are the same. This is obviously very basic and doesn't consider a number of other factors, but I hope this helps.
Owen: I should clarify that my prior post assumed contributions for both spouses. A single taxpayer can only contribute $5,500 in 2013 (plus $1,000 if age 50+).
Here;s our next question from ca2267
ca2267: This is a good question for an estate planning attorney. You may know that any securities/investments owned by her would receive a "step up" in cost basis on her date of death. Example - a stock purchased for $100 with a date of death value of $250. If not sold prior to death, the cost basis now becomes $250 with no capital gains tax on the $150 of appreciation.
ca2267: I'm sorry I cannot directly answer your question. Also, I should state that any securities owned in a retirement account (such as IRA, 401k, etc.) do not receive a "step up" in basis.
Dennis: Great question! You're absolutely correct that tracking IRA basis is tedious. If not properly tracked, these dollars are taxed when withdrawn. Yuck! Also, all distributions from an IRA with both pretax and after-tax dollars are pro-rata among pretax and after-tax dollars so you cannot simply isolate the after-tax dollars for a tax-free withdrawal. In general, it may not make sense to make non-deductible IRA contributions if you have quite a bit of pretax IRA dollars already. If you don't have pretax IRA dollars though, there's a wonderful tax-free "back door" Roth IRA strategy.
Dennis: By the way, the pro-rata distributions to which I referred are still applicable even if you try to separate pretax and after-tax IRA dollars in separate IRAs. The IRS views ALL IRAs in aggregate for this pro-rata distribution purpose.
Terry, we have a follow up from Dennis
Dennis: Sure. If you don't currently have pretax $ in an IRA and your AGI is too high to contribute to a Roth IRA, you can simply make a non-deductible contribution to a Traditional IRA. Then you can convert these dollars to your Roth IRA. There would be no tax on this "conversion" because you're only converting after-tax dollars. Therefore, you've essentially made a Roth IRA contribution. Note that, as of 2010, anyone regardless of AGI can execute a Roth conversion. You'd have to track all of this on your tax return via Form 8606, but it's a great strategy!
Dennis: Know, however, that the IRS also aggregates SIMPLE IRAs and SEP-IRAs so when I say "you don't have pretax IRAs" I'm considering those as IRAs too.
Dennis: Yes, the pretax dollars would be taxable.
Hello, this is Kristine McKinley from Beacon Financial Advisors in Lee's Summit, Missouri. I'm looking forward to answering some of your questions.
Here's our next one from Berta
Berta: Question 1 - If the $ are now in an IRA, this will count as an RMD from your IRA. But this really only matters if you have several accounts from which you need to take RMDs.
Berta: It's also important to know that the 1st dollars distributed from an account in the year you reach 70 1/2 is considered your RMD. So you don't want to rollover $ from 401k to IRA in the year you reach 70 1/2 without first taking your RMD.
Berta: Question 2 - Typically a taxpayer can claim up to $3,000 of capital losses on a tax return to offset taxable income. I think this is what you're asking?
Berta: Regarding question #2, you can use capital losses to offset capital gains. A stock loss is a capital loss and the gain on the sale of your home is also capital, so the two can offset each other. So if you have a $30,000 gain on the sale of your home, and you have $10,000 in capital losses from the sale of stocks, your net capital gain would be $20,000,
Alright, we have a follow-up from Berta